Japan: Land of the Setting Sun?

Introduction
 Shinzo Abe became Prime Minister of Japan in 2007 but resigned
after one year due to health problems.

 He returned to power in 2012 and served until 2020, becoming

Japan’s longest-serving Prime Minister.

 During his second term, Abe introduced economic policies known as

Abenomics.

 Abenomics included three main ideas: printing more money,

increasing government spending, and making long-term reforms.

 These policies helped Japan grow steadily for many years, and about
4 million jobs were created.

 The growth was stopped by the COVID-19 pandemic in 2020.

 Even though there was growth, Japan’s government debt became

very high – about 240% of its GDP.

 The Bank of Japan also printed a lot of money, and its assets
became 120% of the GDP.

 Wages in Japan did not increase much, and inflation stayed lower
than expected.

 Even with his efforts, many economic problems in Japan remained

unsolved.

Emergence of Japan

 Japan is an island nation in East Asia, stretching 1,200 miles with

good climate and fertile land.

 Only the Mongols tried to invade Japan (13th century), but typhoons
(kamikaze) saved it.

 Japan had an emperor since ancient times, but real power was held
by rival clans.

 Although Japan avoided European rule, it adopted many ideas from

China like rice farming, writing, and religion.

 Japan remained isolated for centuries and developed its own unique
culture, including works like The Tale of the Heike.

Tokugawa Period and Western Pressure

 From 1600 to 1868, the Tokugawa shogunate ruled Japan and

followed a “closed country” policy called sakoku.
  Western nations, especially the U.S., started pushing Japan to open
in the 1800s.

 In 1853, U.S. Commodore Matthew Perry arrived in Tokyo Bay with

warships and forced Japan to sign unequal treaties, including
allowing foreign laws for foreigners.

 These humiliations caused anger and led to the Meiji Restoration

in 1868.

Meiji Era Reforms (1868 Onwards)

 The Meiji government aimed to build a "rich country, strong

army."

 Japan created a strong central government and modernized its

army, education, and economy.

 Infrastructure like roads, railways, and a national currency were

developed.

 Japan copied Western institutions but combined them with its own
traditions.

 Powerful family-owned business groups called zaibatsu (e.g.,

Mitsubishi, Mitsui) became major players.

Industrialization and Empire-Building

 Japan became the first non-Western country to industrialize.

 Due to lack of natural resources, Japan expanded its empire.

 It took control of Korea (1870s, full annexation in 1910), fought

wars with China (1894-95) and Russia (1904-05) – and won both.

 Japan created the Greater East Asia Co-Prosperity Sphere in

the 1930s to dominate Asia.

 It invaded Manchuria (1931) and China (1937).

World War II and Aftermath

 Japan joined Germany and Italy in 1940 (Tripartite Pact).

 It attacked Pearl Harbor in 1941 and expanded into Southeast

Asia.

 At its peak, Japan controlled large parts of East and Southeast Asia.

 In 1945, the U.S. dropped atomic bombs on Hiroshima and

Nagasaki, killing ~200,000 people.
  Japan surrendered aboard the U.S.S. Missouri in August 1945.

Post-War Reforms and Constitution

 The U.S. occupied Japan for 7 years after WWII.

 Japan got a new constitution in 1947; Article 9 banned war and

having an army.

 Land reforms were introduced, leftists removed from power, and

democracy was re-established.

 Japan later created a limited military called the Self-Defence

Forces in the 1950s.

 The U.S. promised to protect Japan and kept military bases there.

Zaibatsu vs keiretsu
 Zaibatsu were family-owned conglomerates, while keiretsu are
networks of independent companies with mutual shareholdings.
 Zaibatsu were centralized and vertically integrated under a holding
company, whereas keiretsu are decentralized and built on horizontal
or vertical relationships.
 Zaibatsu were dominant before WWII and were dismantled after the
war, while keiretsu developed in the post-war period as a modern
alternative.
 Zaibatsu had strong links with pre-war militarist governments;
keiretsu were encouraged during Japan’s democratic and economic
rebuilding phase with support from the government and banks.

The Japanese Economic Miracle

 Post-War Ruin (1945): Japan’s industrial output dropped to 30%,

and agricultural output to 60% of prewar levels after WWII.

 Rapid Growth (1950–1975): Japan's economy grew at ~10% per

annum and became the world’s second-largest economy within 25
years of surrender.

 Technocratic Industrial Policy: Ministries like Ministry of Finance

(MOF), Ministry of International Trade and Industry (MITI), Bank of
Japan (BOJ) directed credit, foreign exchange, raw materials, and
technology to strategic sectors. Tariffs protected young industries
from foreign competition.

 From Zaibatsu to Keiretsu: American occupiers dissolved pre-war

conglomerates (zaibatsu). These re-emerged as keiretsu - groups
of allied firms centred around a main bank, sharing cross-ownership
 of shares. Keiretsu firms preferred bank credit over issuing bonds
or shares.

 Stable Political Environment: The Liberal Democratic Party

(LDP) ruled almost continuously from 1955. Political machines and
rural patronage enabled continuity and low interference in policy
making.

 Cold War Benefits: Korean War (1950) was called as “gift from
the gods” by their PM Yoshida Shigeru. Japanese firms supplied UN
forces - major boost for industries like Toyota. U.S. Cold War
spending brought in capital, technology, and demand for goods.

 Labor & Welfare Model:

o Men had lifetime employment in large firms, creating job

security and company-based welfare. Wages rose with
seniority; layoffs were extremely rare.

o Women were typically confined to short-term, clerical roles

and expected to leave work after marriage/pregnancy.

 High Savings Culture: Japanese households saved heavily.

Regulatory restrictions meant savings were deposited in low-interest
banks. Banks used this reservoir of funds to finance industrial
expansion.

 Slowdown in the 1970s: Oil shocks and the end of Bretton Woods
led to currency appreciation. Growth dropped to ~4% per annum
over the next two decades.

 Global Perception in the 1980s: U.S. anxiety grew over Japan

buying U.S. assets. Donald Trump and others voiced fears of
economic colonization by Japan. Some even predicted military
conflict.

📉 Japan’s Lost Decades

🔻 Asset Bubble & Burst (Late 1980s–1990s)

• Rapid Yen Appreciation (Post-Plaza Accord, 1985): After the Plaza

Accord in 1985, major economies agreed to depreciate the U.S. dollar. As
a result, the Japanese yen rapidly appreciated from 237 to 121 per USD in
just two years. This sudden appreciation made Japanese exports more
expensive and less competitive globally, which deeply impacted Japan's
export-driven economy. This situation is often referred to as the "strong
yen recession."
• BOJ Response: To cushion the economy from the impact of the strong
yen, the Bank of Japan (BOJ) reduced interest rates drastically—from 8%
to 3% between 1985 and 1987—to encourage borrowing, investment, and
domestic spending.

• Financial Deregulation & Speculation: Under pressure from the U.S.

to open up its economy, Japan deregulated its financial markets. With
fewer restrictions and lower interest rates. Japanese banks looked for
profitable areas to lend, leading to aggressive lending to real estate and
construction sectors.

• Massive Asset Bubble: The easy credit environment led to an

enormous asset price bubble:

 The Nikkei stock index tripled from 1986 to 1990. Stock market
value surged to 150% of Japan’s GDP. Land prices skyrocketed, with
the value of all land in Japan briefly exceeding the total land value of
the entire United States—a huge overvaluation.

• Burst of the Bubble (1989–1990): To control rising inflation and

speculation, the BOJ increased interest rates in 1989. This move triggered
panic:

 Investors rushed to sell, crashing asset prices.

 The Nikkei stock index fell by 50%.

 Real estate prices dropped by 87%.

 The scale of the economic damage (in wealth lost) was said to be
three times worse than the U.S. during the Great Depression.

🏦 Banking Crisis & Zombie Firms

 Non-performing Loans Crisis: After the Asset Bubble Burst, land

and stock prices crashed. Collateral (like real estate) backing loans
lost value — banks couldn't recover money from defaults. This led to
a massive pile-up of bad loans on bank balance sheets. Instead of
writing off these loans, banks kept re-lending to dead/inactive
companies — known as "zombie firms" — to avoid declaring
losses.

 Crony Capitalism Accusations: Strong ties between banks, the

government, and corporations led to biased bailouts and favorable
lending. Critics accused Japan of crony capitalism where inefficient,
failing companies were kept alive instead of being allowed to fail.

 Balance Sheet Recession (Richard Koo’s Theory): Firms

prioritized debt repayment over new investment, so firms saved
 money instead of spending. As a result, expansionary monetary
policy failed to revive growth.

💰 Fiscal Policy Response (Post-Bubble Japan)

 Government Stimulus (Spending to boost the economy) The

Japanese government spent a lot of money to help the economy
recover after the bubble burst. For every 1 yen spent, it gave 2 to 3
yen worth of economic activity, which means it worked for a short
time. But instead of spending money in cities or industries that
needed it most, the government spent more in villages and areas
where their political party (LDP) had strong support — so the impact
was not efficient.
 Rising Public Debt (Government borrowed a lot): Because the
government kept spending without earning more, Japan’s debt
increased a lot. By the year 2000, Japan’s government debt became
more than 100% of its total GDP (very high). In 1997, to reduce this
debt, the government increased the sales tax from 3% to 5% — but
this reduced people's spending, and Japan went back into recession.

 More Stimulus in 1998 (Big rescue package): In 1998, Japan

gave a very large package of ¥72 trillion to support the economy
again. It was 5 times bigger (per person) than what China gave in
2008 during the global crisis. This did not create big growth, but it
stopped people from becoming jobless or poor.
 Pension Reform (2004): Japan changed its pension system to
adjust based on how many old people, how much salary people
earn, and price levels. It was designed to make pensions long-term
sustainable. Due to this government had to keep paying more, even
when prices were low.

🏦 Monetary Policy (1990s–2000s)

 After Japan's asset bubble burst, the BOJ was slow to cut interest
rates and reached near-zero only in 1995, which caused deflation.
(High interest rates made borrowing expensive → fewer people took
loans → spending & investment dropped → prices started falling
which is known as deflation.
 Economist called it a "liquidity trap", and Ben Bernanke criticized
BOJ for doing too little and suggested 3–4% inflation.
 The BOJ disagreed, saying more money wouldn't help if banks didn’t
want to lend.
 In 2000, the BOJ raised interest rates despite weak growth but
reversed the hike in 2001 after the global dot-com crash.
Global Financial Crisis (2008–2012): Japan’s banks had little exposure
to U.S. subprime assets, but Japan’s GDP dropped even more sharply than
the U.S. or Europe. With already near-zero interest rates (0.5%), Japan
couldn’t cut rates further as a response. The BOJ relaunched Quantitative
Easing (pumped money into banks by buying government bonds and
stocks) and bought assets equal to 37% of GDP between 2009 and 2012,
but deflation still came back.

Labor Market & Inequality: Japan moved away from lifetime

employment, and temp workers increased from 15% in 1984 to 33% in
2014. This shift caused higher inequality, and average real wages dropped
by 15% between 1997 and 2013, creating a new “working poor” class.
Young people had mixed feelings — some liked the job flexibility, while
others missed stable corporate life; yet 73% of people in their 20s
reported being happy in the 2010s.

Demographic Decline: Japan’s fertility rate fell from 2.1 in the 1970s to
about 1.4 in the 2010s. The population peaked at 128 million in 2008 and
is expected to shrink to 97 million by 2050. The elderly population (65+)
is set to increase from 25% to nearly 40%. Social issues like rising
singlehood, delayed marriage, high childcare costs, and job insecurity
worsened the population crisis. In a 2010 survey, 36% of teenage boys in
Japan said they were not interested in sex.

Immigration Challenges: Japan didn’t use immigration like other

countries to solve labor shortages and kept its immigration policy tight.
Some foreign workers faced abuse under training programs and found it
hard to adjust due to Japan's rigid social system. After the 2008 crisis,
Japan even paid some immigrants to return home instead of letting them
stay and work.

Natural Disaster & Nuclear Crisis (2011): In 2011, a massive

earthquake and tsunami hit Japan, causing over 15,000 deaths. The
Fukushima nuclear plant suffered meltdowns, forcing 470,000 people to
evacuate. The public was angry at companies and regulators for safety
failures, leading to the shutdown of nuclear plants across the country.

Abenomics Overview:

 Abenomics is the economic policy program introduced by Prime

Minister Shinzo Abe in 2012 to revive Japan’s stagnant economy.
The policy aimed to address deflation, weak demand, and
Japan’s aging population.

 Focused on three key policies known as the Three Arrows:

 1. Aggressive monetary easing

2. Expansionary fiscal policy

3. Structural reform

The First Arrow: Aggressive Monetary Easing

 The first arrow involved aggressive monetary easing by the Bank of

Japan (BOJ) to increase the money supply, control deflation, and
lower interest rates. The aim was to boost economic activity by
encouraging lending and investment.

 The BOJ implemented a policy of massive asset purchases, including

government bonds, to flood the economy with liquidity. It also set an
inflation target of 2 percent, hoping to push inflation expectations
upward.

 While this policy led to some short-term gains, it had limited long-
term success The Nikkei index doubled, benefitting exporters due
to a weaker yen. But the effectiveness of monetary easing was often
questioned, as it did not fully address the underlying structural
issues in the economy.

The Second Arrow: Fiscal Stimulus and Consolidation

 The second arrow focused on flexible fiscal policy, involving

increased government spending to stimulate demand. This included
public infrastructure projects, government subsidies, and other fiscal
measures aimed at boosting consumption and investment.

 One-third allocated to disaster reconstruction and prevention, the

rest aimed at stimulating investment, revitalizing local economies,
R&D, and infrastructure. Government estimate 600,000 jobs will
be created, 2% increase in GDP.

 The Japanese government increased spending on areas like

healthcare, defense, and social programs to create jobs and inject
money into the economy. This was intended to provide a short-term
economic boost.

 Despite some initial economic stimulation, Japan's rising national

debt became a concern. Fiscal stimulus contributed to a significant
increase in Japan's public debt.

 Consumption tax increase led to a recession. The economy

entered recession again after the second increase in 2019.
Corporate tax rate reduced from 38% to 30% between 2012 and
2020. Made Japan’s corporate tax system more competitive
 internationally but led to complaints from consumers about their
increasing tax liabilities.

 Abenomics’ stimulus would raise Japan’s government debt to

almost 250% of GDP. IMF warned that the high debt burden was
unsustainable, urging a consolidation plan.

The Third Arrow: Structural Reforms

 The third arrow focused on structural reforms aimed at addressing

the fundamental issues in Japan’s economy, such as labor market
rigidities, corporate governance, and regulatory barriers. Abe's
government sought to create a more dynamic and flexible economy.

 Abe’s goal was to shift focus from hours worked to output

produced. Mandate paid holidays and intervals between working
hours. Equal pay for equal work. It Resulted in decrease in
average work hours and a rise in real hourly wages for regular
and part-time workers.

 Abe aimed to boost female labour force participation, calling women

an “underutilized resource.” Initiated policies to increase female
employment, including free preschool for children aged 3-5 and
new daycare slots. Working-age female participation
increased from 63% to 72% between 2012-2019. Despite gains,
women still earned less (24.5% less than men by 2018) and
faced workplace discrimination. Abe pushed for gender equality
in leadership positions, though only a small percentage of
leadership roles were held by women.

 Although there were some positive changes, such as more women

entering the workforce, broader reforms were less impactful than
anticipated. Progress was often hindered by political and societal
barriers.

Foreign Policy

 Abe wanted Japan to become a stronger and more respected

country globally.
He became Prime Minister during a time of increasing threats from
China and North Korea. China was being more aggressive in Asia,
and North Korea was testing missiles.
 Soon after taking office, Abe created Japan’s first National Security
Strategy and Security Council which helped Japan make better
decisions on military and defense matters. Military spending
increased by around 10% during his time but still less when
compared to countries like China and the U.S.
  Abe tried to officially change Article 9 of the Constitution, which
bans war, but failed.
 Abe strengthened Japan’s alliance with the U.S. and built closer ties
with India, Australia, and Southeast Asia.
 He also pushed Japan’s claims in territorial disputes with China,
South Korea, and Russia.

Economic Challenges and Solutions

 Abe introduced “Abenomics” to boost Japan’s slow economy. From

2012 to 2019, Japan's real GDP grew by 7.4% and nominal GDP by
11.9%, which was better than the previous seven years.
 After the 2008 global financial crisis, Japan and other countries
faced slow growth and low inflation. This situation was described by
economists as “secular stagnation.”
 Japan had serious demographic issues because fewer babies were
being born, and people were living longer—this increased the
number of elderly people needing support.
 A smaller working population had to support more retired and non-
working people. This raised the dependency ratio and put pressure
on public savings and pensions.
 The term “Japanification” was used worldwide to describe similar
economic challenges. Experts warned that countries like the U.S.
could also face long-term stagnation due to aging populations and
low growth, just like Japan.

Reflections on Abe’s Legacy

 Abe's term saw job creation, economic growth, and increased public
confidence, though he couldn’t restore post-war high growth or
revise Article 9.
 Japan’s aging population and demographic challenges limited
economic potential, making it hard to achieve long-term growth
goals.
 While Abe believed in continued growth, some citizens supported a
shift toward degrowth and quality of life, leading to a national
debate about Japan’s future path.